A common question that I get is, "When will Dell start promoting
desktop
Linux
computers?" As the largest seller of computers, Dell is significant (16.5% market share),
but
unfortunately the answer is "probably not for a long time." Given the economic
dependencies of the Dell-Microsoft relationship, Dell risks impacting
their profitability if they actively
promote desktop Linux. While some within Dell see desktop Linux fast
approaching and want to be a leader, the realities of their financial
ties to Microsoft
eventually rear up and short circuit any meaningful development. It
reminds me of the hilarious subservient chicken web site.

"...the dominoes are falling, it's just a matter of which direction."

Dell will be difficult to get behind desktop Linux because of their
longstanding, successful alliance with
Microsoft. Two recent experiences illustrate
the situation quite vividly. Dell recently invited two top executives from
Linspire to give some presentations about desktop Linux. They wanted to
know where it's at and where it's going. We confirmed meeting dates,
attendees and flew our two executives to Austin. Higher up Dell executives found out about these meetings the day
before and abruptly canceled them. In a second example, we announced
that one of our partners, Questar
was going to be selling Dell computers in
Europe pre-installed with Linspire. European Dell personnel had been
discussing both marketing and technical integration issues. Engineers
in Ireland, working for Dell, had asked for our help in imaging hard
disks for new machines. When US Dell executives heard about the
European plan they immediately canceled the program.

To understand
Dell's motivations you have to examine their economic
ties to Microsoft, and understand that Microsoft routinely pressures
partners not to support desktop Linux, since they recognize the desktop
is the root of their monopoly. (Microsoft doesn't have a monopoly on
servers, which is why they care less about Linux servers, from Dell or otherwise.) Microsoft
works very hard to keep secretive their prices and in spite of having a
multi-billion dollar relationship, Dell and Microsoft do not disclose
any specifics in their respective SEC documents. Dell sold about 7
million PCs in their last quarter, with $799 million in profits. After
being found guilty twice for anti-trust violations, Microsoft was ordered
by the court to sell XP to the top 20 OEMs at the same price.
To circumvent this requirement (which was included as part of
the eventual settlement with the DOJ), Microsoft gives kickbacks
to vendors based on the number of computers they sell. Estimates
of these range from
$2-$10 per computer. Dell also has a sweetheart deal on Microsoft Office
licensing which gives them a competitive advantage over other OEMs,
helping them win the pricing game. (The anti-trust ruling did not
address Microsoft Office pricing.) On the majority of Dell web pages
you'll see:

Dell recommends
Microsoft® Windows® XP Professional

This is a requirement of the
MDP (market development program), a
Microsoft
tactic used to control what web pages or computer advertisements look
like.
When you sum these amounts (MDP, per computer kickbacks and Microsoft
Office pricing), it's obvious that a significant amount of Dell's
profitability is tied to Microsoft's largess. It's impossible to know
precisely how much, but if you do the math and assume that it's $30 per
computer from those various sources, that would yield $200 million or
more than 25% of Dell's profitability. It could be more or less than
this number, but any way that you look at it, Dell is dependent on
Microsoft
for a massive chunk of their profits.

Michael Dell, the chairman and founder of Dell,
is a brilliant guy. He and I have traded a couple of emails in the past
and I even sent him a couple SIPphones
when he asked to try
them out. My admiration doesn't stop with Michael. He's clearly built a
phenomenal organization from top to bottom. Very impressive indeed. But
Dell's business prowess doesn't change the fact that Dell is a very low
margin business beholden to Microsoft.

As Scott McNealy said, Dell is a
grocery store for electronics. There's nothing wrong with that, but
grocery stores have very low margins and can't risk upsetting
their most critical
supplier. Until desktop Linux grows in significance, until competitors
undercut Dell's pricing by offering Linux, until revenues and
profits are taken from Dell, Dell will not risk upsetting Microsoft and
actively
market desktop Linux. They may bury a product or two on their website,
but they won't be a leader in desktop Linux. Dell is winning with the
computer industry as it is now. Radical change
comes from companies that are losing. Look for the charge to desktop
Linux to come from companies chasing Dell and looking for a competitive
advantage.
Fortunately, more than 83% of the computers sold worldwide today are
from vendors who are looking for a competitive edge over Dell. So the
dominoes are falling, it's just a matter of which direction.

-- MichaelThe Michael's Minute Meter

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